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Long term contracts have a price

Here’s a great article written by consumer advocate, Ellen Roseman.  She points to different industries where signing in for the long term protection can be very costly and expensive.

Ever wanted to change cell phone providers?  How about internet providers?  Move your investments or rrsps?  Cancel that hydro or gas contract because you moved?

And how about mortgages?  When interest rates started heading downward about 12 months ago, thousands of borrowers in fixed rate mortgages wanted to get out of their higher rates and start benefitting from the record low interest rates we have been seeing.

But they were shocked to hear of unbelievably high early prepayment penalties… the example Ellen uses is about a $46k penalty on a $530k mortgage with a major bank…  I’ve seen dozens and dozens of situations like this.

Beware of long term mortgages… with the average person moving or refinancing about every 3 years, choosing a 5 year fixed rate term is usually not the best option.  It could cost you more than you think… always seek professional advice from a reputable mortgage broker before selecting your mortgage.

(Just a personal note… It sure would have been nice to see some mortgage relief given to the average homeowner during the recession.   CMHC used to cap their penalties to 3 months interest but removed this cap in 2000…quietly, all financial institutions are free to charge a higher penalty…and they all do.. the longer the term, the greater the penalty…)

Should they buy a bigger house?

Here’s a case study from the Financial Post about a young couple with a young child looking to move out of their condo and into a house with a yard.  They have a good combined income of $118k per year.  Debt load is low.  They own a condo and have a small mortgage.

In the end, they will need a $300k mortgage. Can they afford to buy a larger home today?   The experts say yes… and I agree based on the data provided.

One more thing that isn’t mentioned but I wanted to point out… affordability.. given interest rates are at record lows, their mortgage payments would be lower than ever… Cashflow is always important and must be considered.

Your best interest is my only interest.

As always, I welcome your comments, calls and questions.

Steve Garganis 416 224 0114 steve@mortgagenow.ca

58% of Canadians want to pay down their debts

The latest Canadian Consumer Outlook index showed that 58% of Canadians are worried about their debt.  This is a great time to get your debts reviewed…. a financial check-up…

With December credit cards bills coming in and your property tax bills coming up in the next few months, now is the time for a review… and guess what.. you might be pleasantly surprised to discover that there is some savings potential in your mortgage.  Debt Consolidation is not a bad word.

Call your mortgage broker for a review today.

How to reduce mortgage penalties

Interest rates are at records lows.. it’s popular water-cooler talk… You’ve heard your co-workers or friends who are lucky enough to renew their mortgage into these emergency, once in a lifetime rates..

But how you do you take advantage?  If you break your fixed rate mortgage then you face an enormous prepayment penalty…we’ve seen reports of $10k, $15k and $20k in penalties….Wow!

Well, here’s a few tips…

-first, if you are in a 10 year fixed rate mortgage, and your are at least 5 years into the term, then the maximum penalty is 3 months interest  (this is a little known fact… Section 10 of the Interest Act of Canada).

-One more way to reduce the penalty is to utilize the annual prepayment privilege that’s within the mortgage.  Most mortgages have between 15% and 25% prepayment privileges which equates to a 15% to 25% reduction in the penalty….

-negotiate the penalty in combination with an extension on your current term..this requires some discussion with your current lender and you should seek the help of a mortgage broker…if the lender wants your business they may be able to offer some incentive to stay.

Another situation where the lender cannot charge any penalty is if the mortgage goes into default and the lender issues a Notice of Sale (legal action to collect the mortgage)…. of course, I”m not suggesting that anyone default on their mortgage.

Our best piece of advice is this… don’t take the lender’s penalty calculation at face value… penalty calculations have changed and most bankers couldn’t tell you how the penalty is calculated if you asked them.  Always review the penalty with an unbiased party… speak with your mortgage broker or lawyer…enjoy the weekend!

Mortgage rates went down?

What’s this? RBC,  BMO and National Bank have lowered their posted fixed rates?  Yes, it’s true… the 5 year fixed rate is now 5.39%.  Bond rates have come down over the past few weeks after some concerns about the speed of the recovery.

These are posted branch rates…some banks advertise lower special rates of around 4.09%…. of course, there are even lower wholesale or discounted rates through the mortgage broker market…. speak to your mortgage broker to get current rates.

Variable rates aren’t expected to move anytime soon…  in fact, here’s one forecast for interest rates to remain flat for the entire year…. and I think this is very possible..  Happy Savings!!!

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